How Technology Has Created Investment Opportunities in Farming

Written by: Sam Halpert

Our recent trips to the American Midwest confirmed that technology has found firm footing within the farming community of the agriculture sector and that this high-tech trend is likely to continue to grow in importance.

As part of our deep dive into the agriculture sector, we spent much of August in the Midwest taking in numerous field tours, management meetings, and farm shows. These trips confirmed for us that technology has found firm footing within the farming community, even though the average age of a U.S. farmer is 58 years old. 1 The technology trend is likely to continue to grow in usage and importance. Here we explore how it may shape agriculture, and future agricultural investment, in the years to come.

Driving Toward 300 Bushel Corn

Changes in the agriculture industry are continuously being driven by the dual imperatives of maximizing crop yields and minimizing climate impacts. Advances in technology underpin the success of the industry in achieving these goals. Despite three years of bumper crops, the need to dramatically increase global food production to feed the world is unrelenting. The Food and Agriculture Organization of the United Nations ("FAO") estimates that population growth will increase more than 35% by 2050 and accordingly, agricultural production must rise by approximately 60%. Furthermore, the FAO highlights that there is minimal additional acreage available for increased farming and most of this potentially available land is located in Sub-Saharan Africa.

In the past few decades, the increased food demands of the growing global population have been met primarily through improvements in crop yield. For example, U.S. corn grain yields were approximately 50 bushels per acre (“bu/acre”) in 1960. By 2010, U.S. corn grain yields had increased threefold to 150 bushels per acre, as shown in the following chart.

Goldman Sachs estimates that since 1970, almost 90% of our yield gains have come from seed improvements. Goldman also estimates that by 2050 we will need yields of more than 280 bushels per acre to meet growing food demand. It estimates that more than half of the yield enhancements will be the result of precision related applications, which aim to optimize field-level management.

Iowa’s One-Man Monsanto

Exciting farm innovation is coming from both the micro- and mega-farming tiers. For example, at an August dinner in Des Moines, we met one farmer who is essentially a one-man Monsanto. 2 The farmer and his company receive royalties on nearly two thirds of every seed in the ground in the U.S. Despite being one of the richest men in Iowa, he still continues to farm and was clearly disappointed with his farm’s 300 bu/acre corn yield. He suggests that Bayer’s 3 proposed acquisition of Monsanto could lead to less innovation (due to more bureaucracy) and that his company’s advancements are driving significantly greater yield improvements. Typically, corn grows eight to twelve feet high with ten-inch spacing. His company is experimenting with growing five-foot corn that is spaced more narrowly at five inches, which have resulted in higher test weights and smaller cob size.

Nevertheless, mega-farmer Monsanto is also doing its part to drive agriculture technology. Monsanto has recently been promoting that it is adding multiple “modes of action” (essentially giving seeds more functionality) to every seed and that it can test/develop new seed traits with increasing speed and efficiency. Ultimately, Monsanto believes that by 2030 it can increase yields in the U.S. to 300 bu/acre.

Advancements in Digital Agriculture and Precision Machinery

Monsanto is also striving to increase yields through improvements in digital ag, as reflected in its $1.1 billion purchase of Silicon Valley based Climate Corporation 4 ("Climate") in 2013. Although early on Monsanto struggled to integrate the big data weather company, by 2016 the integration path for Climate is clearer and the benefits for farmers more obvious. Climate is linking drones and in-field sensors to its digital analytics platform and, most importantly, is opening its platform to other service providers, essentially creating a marketplace for farm technology. (Perhaps Amazon would be a better partner for Monsanto rather than Bayer?)

While seeds and herbicides are the building blocks of increased yield, increasingly sophisticated farming machinery is needed to help maximize these benefits. John Deere 5 has approximately doubled its research and development spending in the past 10 years, and this has resulted in increased efficiency and precision for farmers.

Imagine this scenario: You are a farmer in the cockpit of a tractor holding an iPad. Your farm is laid out in grids. You know exactly where to apply more or less nitrogen fertilizer. You can space seeds accurately and closer together. The soil is more receptive to seeds, and this allows optimal sunlight for every seed. You avoid double planting seeds when your tractor turns at the end of a row because your planter knows you are turning. Most importantly, perhaps, your tractor’s auto steering and dynamic positioning allow you to relax in your seat and focus on other issues, or perhaps daydream.

Technology Remains the Future

2016 has been a banner year for mergers and acquisitions in agriculture. The deals have been huge and relatively frequent: The Dow Chemical Company 6 and Dupont, 7 Bayer and Monsanto, Agrium 8 and PotashCorp, 9 and on a smaller scale, John Deere and Precision Planting. 10 While the downturn in agriculture has driven some of the push to consolidate and cut costs, there is a strong undercurrent of technology, via productivity enhancement, big data, and precision agriculture, running through all of these deals.

Balancing the demand for greater crop yields and global food production with environmental sustainability remains the critical future challenge for the ag industry and will likely drive persistent change. We believe key trends in the benefits from technological advancements and the companies leading and capitalizing on these trends should create ongoing compelling investment opportunities.

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IMPORTANT DISCLOSURE 1 United States Department of Agriculture Census 2012.2 Monsanto represented 0.0% of Fund net assets as of 9/30/16.3 Bayer AG represented 0.0% of Fund net assets as of 9/30/16.4 The Climate Corporation represented 0.0% of Fund net assets as of 9/30/16.5 John Deere represented 0.0% of Fund net assets as of 9/30/16.6 The Dow Chemical Company represented 0.0% of Fund net assets as of 9/30/16.7 Dupont represented 0.0% of Fund net assets as of 9/30/16.8 Agrium Inc. represented 1.84% of Fund net assets as of 9/30/16.9 PotashCorp represented 0.0% of Fund net assets as of 9/30/16.10 Precision Planting represented 0.0% of Fund net assets as of 9/30/16.Any discussion of specific securities mentioned in this post is neither an offer to sell nor a solicitation to buy these securities.